Discusses the legal requirements/options for joint venture/licensing in this market.
Last Published: 8/29/2019

Koreans prefer to maintain local control of JV operations with foreign entities.  Thus, the financial goals, internal organization, and key management issues of a JV must be agreed upon by all involved parties as early as possible.  Reaching such an agreement can take time.
Foreign direct investment (FDI) is encouraged and promoted by the Korean government.  With the ratification and implementation of the KORUS FTA in 2012, greater cooperation and encouragement of FDI is expected.  Korea offers strong incentives to potential foreign investors in a bid to attract more foreign direct investment into Korea. The Korean government has frequently made clear its desire to improve the business environment for foreign investors and attract more FDI.

  • When considering FDI in Korea, it is important to consider the following:  
  • The decreasing influence of (some) chaebols (conglomerates), the Korean government’s promotion of SMEs, and the government’s interest in seeking anti-monopolistic and more diversified JVs;
  • Koreans prefer to maintain local control, regardless of percentage invested by foreign entities; and
  • Management control should be evaluated on three levels: 1) shareholder equity; 2) representation on the board of directors; and 3) active management (representative director and subordinate management).  Legally, Korean board meetings require the physical presence of all JV members, as well as a quorum of the directors.  If a foreign investor intends to exercise day-to-day management of an operation, a representative director who resides in Korea must be appointed.  The director requires the support of and access to key functional areas of the company to manage in accordance with the foreign investor’s wishes.
Contractual Agreements in Korea

Well-written, well-understood, and well-executed contractual agreement provide the basis for a U.S. firm’s success in Korea.  Cultural differences surrounding the expectations of a contractual agreement and how one successfully arrives at a mutually beneficial agreement is often the basis of consternation and challenges.  For Koreans:
 
  • A contract represents the ‘current understanding’ of a deal.  It is the beginning, rather than the end, to a negotiation;
  • Any change in the circumstances surrounding the contract (omissions, invalid issues, new leadership, non-existent issues) may cause problems to arise;
  • Koreans may regard a contract as a "gentlemen's agreement," subject to further negotiation should conditions change; Americans generally regard the same written agreement as legally binding.
  • Contract negotiations in Korea should be viewed as an ongoing process of dialogue and should have the following objectives:
  • Reaching a common understanding about the deal;
  • Reaching an understanding about each party’s responsibilities;
  • Recording the detailed understandings;
  • Being prepared to modify the terms of the agreement should there be a change in circumstances (leadership, other issues).
  • Additionally, the following precautions should be addressed:
  • Technology transfer, raw material supplies, marketing, and distribution should be agreed upon, in detail, in the JV agreement.
  • A company’s IP may not be protected and could be vulnerable in the later stages of a JV business relationship, especially if the Korean company depends upon the transfer of technology (see section on Protecting your IP, also in this chapter).
  • Korea’s legal system can be lengthy, cumbersome and expensive.  When dealing with contracts, the best strategy is to prevent conflicts.

Foreign investors are encouraged to consult the Korean Commercial Arbitration Board (Consult: http://www.kcab.or.kr/servlet/kcab_adm/memberauth/5000).  The KCAB advises foreign companies on contract guidelines.

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